Public Pensions and Arithmetic Problems at Fox on 15th (a.k.a. The Washington Post)

The Post made yet another effort to attack public sector employees today in an editorial (this one is on its editorial page) that criticized the rate of return assumptions used by public pension plans. It tells readers that:

"Eighty-eight of the 126 largest public pension plans assume a rate of return exceeding 8 percent a year, according to the Wall Street Journal. By way of comparison, the S&P 500 achieved a compound average annual growth rate of 5.69 percent over the past 20 years."

Okay, get your calculators out boys and girls. If I look up the value of the S&P 500 for March 1991 I get 375.22. The S&P closed yesterday at 1313.8. This gives a compounded annual rate of return of 6.46 percent.

But wait, we have to share a little secret with the folks who write editorials for the Washington Post: stocks pay dividends. Dividends are typically paid out quarterly and usually average 3-4 percent of the stock price. If we add in dividend yields, then we would get an average return over the last 20 years in the 9-10 percent range that is assumed by pension funds in their analysis.

Of course returns going forward will depend on the current ratio of stock prices to corporate earnings. This is around 15 today (measured against trend earnings) compared to about 20 in 1991, suggesting that the prospects going forward over the next 20 years are likely better than they were back in 1991.

It is especially ironic to see these misplaced warnings about excessive stock return assumptions in the Washington Post. This is a paper that for years featured the columns of James K. Glassman, the co-author of Dow 36,000. At the time, it had no room in the paper for those of us who tried to warn of the risks of the stock bubble.